Activity Based Costing (ABC)

Activity-based costing (ABC) is a costing methodology used to more accurately allocate overhead/indirect costs to the items and activities that use it. The ABC costing method does this by assigning costs to products, services and projects based on the resources activities consumed and the subsequent activities that go into them.

ABC is an effective way for businesses to understand the complex relationship between cost and profitability as a result of products, customers, production and processes. By assigning indirect costs to these activities, ABC is used to reduce superfluous overhead, unprofitable products, identify ineffective processes and lower prices.

Often, ABC is used by the manufacturing industry because of the emphasis on production, the complexity of its activities, and their associated costs.